---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

---

Form 10-Q

(Mark One)

|ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarter ended July 31, 2002 OR

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number 000-22009

---

NEOMAGIC CORPORATION(Exact name of Registrant as specified in its charter)

DELAWARE(State or other jurisdiction
of incorporation or organization)

77-0344424(I.R.S. Employer Identification No.)3250 Jay Street
Santa Clara, California(Address of principal executive offices)

95054(Zip Code)


(408) 988-7020(Registrant's telephone number, including area code)

---

Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

The
number of shares of the Registrant's Common Stock, $.001 par value, outstanding at July 31, 2002 was 28,275,375

---

---

Page 1 of 26

---



NEOMAGIC CORPORATION
FORM 10-Q

INDEX

|              |                                                                                                   |    | Page 
|------------- | ------------------------------------------------------------------------------------------------- | -- | -----
|PART I.       | CONSOLIDATED CONDENSED FINANCIAL INFORMATION                                                      |    |      
|Item 1.       | Unaudited Consolidated Condensed Financial Statements:                                            |    |      
|              | Consolidated Condensed Statements of Operations
Three and Six months ended July 31, 2002 and 2001 |    | 3    
|              | Consolidated Condensed Balance Sheets
July 31, 2002 and January 31, 2002                          |    | 4    
|              | Consolidated Condensed Statements of Cash Flows
Six months ended July 31, 2002 and 2001           |    | 5    
|              | Notes to Unaudited Consolidated Condensed Financial Statements                                    |    | 6-10 
|Item 2.       | Management's Discussion and Analysis of Financial Condition and Results of Operations             |    | 11-23
|Item 3.       | Quantitative and Qualitative Disclosures about Market Risk                                        |    | 23   
|PART II.      | OTHER INFORMATION                                                                                 |    |      
|Item 1.       | Legal Proceedings                                                                                 |    | 24   
|Item 2.       | Changes in Securities                                                                             |    | 24   
|Item 3.       | Defaults Upon Senior Securities                                                                   |    | 24   
|Item 4.       | Submission of Matters to a Vote of Security Holders                                               |    | 24-25
|Item 5.       | Other Information                                                                                 |    | 25   
|Item 6.       | Exhibits and Reports on Form 8-K                                                                  |    | 25   
|Signatures    |                                                                                                   | 26
|Exhibit 10.22 | Full and Final Release from the Wafer Supply Agreement and the Product Sourcing Agreement         |    |      
|Exhibit 99.1  | Officer Certification                                                                             |    |      

Page 2 of 26

---



Part I.    Financial Information

Item 1.    Financial Statements

NEOMAGIC CORPORATION  CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS  (In thousands, except per share data)  (Unaudited)

|                                                                 |                                                      | Three Months Ended       |         | Six Months Ended |       
|---------------------------------------------------------------- | ---------------------------------------------------- | ------------------------ | ------- | ---------------- | ------
|
|Net sales                                                        |                                                      | $                        | 494     |                  | $     
|Cost of sales                                                    |                                                      |                          | 720     |                  |       
|                                                                 |                                                      |                          |         |                  |       
|Gross margin (loss)                                              |                                                      |                          | (226    | )                |       
|Operating expenses:                                              |                                                      |                          |         |                  |       
|                                                                 | Research and development(1)                          |                          |         | 5,495            |       
|                                                                 | Sales, general and administrative(2)                 |                          |         | 2,341            |       
|                                                                 | Special Charges                                      |                          |         | 2,200            |       
|                                                                 |                                                      |                          |         |                  |       
|                                                                 |                                                      | Total operating expenses |         |                  | 10,036
|                                                                 |                                                      |                          |         |                  |       
|Loss from operations                                             |                                                      |                          | (10,262 | )                |       
|Other income (expense), net:                                     |                                                      |                          |         |                  |       
|                                                                 | Income, net of expenses, from the sale of DVD assets |                          |         |                 |       
|                                                                 | Interest income and other income                     |                          |         | 672              |       
|                                                                 | Interest expense                                     |                          |         |                 |       
|                                                                 |                                                      |                          |         |                  |       
|Loss before income tax benefit                                   |                                                      |                          | (9,590  | )                |       
|Income tax benefit                                               |                                                      |                          | (339    | )                |       
|                                                                 |                                                      |                          |         |                  |       
|Net loss                                                         |                                                      | $                        | (9,251  | )                | $     
|                                                                 |                                                      |                          |         |                  |       
|Basic and diluted net loss per share                             |                                                      | $                        | (0.33   | )                | $     
|Weighted average common shares outstanding for basic and diluted |                                                      |                          | 28,167  |                  |       

---

See
accompanying notes to consolidated condensed financial statements.

Page 3 of 26

---



NEOMAGIC CORPORATION  CONSOLIDATED CONDENSED BALANCE SHEETS  (In thousands)

|                                     |                                                  | July 31,
2002                              |        | January 31,
2002(1) |       
|------------------------------------ | ------------------------------------------------ | ------------------------------------------ | ------ | ------------------- | ------
|
|ASSETS                               |                                                 
|Current assets:                      |                                                  |                                            |        |                     |       
|                                     | Cash and cash equivalents                        |                                            | $      | 47,390              |       
|                                     | Short-term investments                           |                                            |        | 26,549              |       
|                                     | Accounts receivable, net                         |                                            |        | 297                 |       
|                                     | Inventory                                        |                                            |        | 254                 |       
|                                     | Income tax receivable                            |                                            |        | 9,576               |       
|                                     | Other current assets                             |                                            |        | 972                 |       
|                                     |                                                  |                                            |        |                     |       
|                                     |                                                  | Total current assets                       |        |                     | 85,038
|Property, plant and equipment, net   |                                                  |                                            | 2,954  |                     |       
|Restricted cash                      |                                                  |                                            |       |                     |       
|Employee notes receivable            |                                                  |                                            | 1,300  |                     |       
|Goodwill                             |                                                  |                                            | 4,175  |                     |       
|Intangibles, net                     |                                                  |                                            | 5,282  |                     |       
|Other assets                         |                                                  |                                            | 350    |                     |       
|                                     |                                                  |                                            |        |                     |       
|                                     |                                                  | Total assets                               |        | $                   | 99,099
|                                     |                                                  |                                            |        |                     |       
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                                 
|Current liabilities:                 |                                                  |                                            |        |                     |       
|                                     | Accounts payable                                 |                                            |        | 2,381               |       
|                                     | Compensation and related benefits                |                                            |        | 1,729               |       
|                                     | Income taxes payable                             |                                            |        | 3,525               |       
|                                     | Deferred rent                                    |                                            |        | 418                 |       
|                                     | Deferred gain on the sale of DVD assets          |                                            |        |                    |       
|                                     | Wafer purchase agreement restructuring liability |                                            |        | 3,600               |       
|                                     | Other accruals                                   |                                            |        | 257                 |       
|                                     |                                                  |                                            |        |                     |       
|Total current liabilities            |                                                  |                                            | 11,910 |                     |       
|Commitments and contingencies        |                                                  |                                            |        |                     |       
|Stockholders' equity:                |                                                  |                                            |        |                     |       
|                                     | Common stock                                     |                                            |        | 28                  |       
|                                     | Additional paid-in-capital                       |                                            |        | 86,876              |       
|                                     | Deferred compensation                            |                                            |        | (431                | )     
|                                     | Accumulated other comprehensive income           |                                            |        | 17                  |       
|                                     | Retained earnings                                |                                            |        | 699                 |       
|                                     |                                                  |                                            |        |                     |       
|                                     |                                                  | Total stockholders' equity                 |        |                     | 87,189
|                                     |                                                  |                                            |        |                     |       
|                                     |                                                  | Total liabilities and stockholders' equity |        | $                   | 99,099
|                                     |                                                  |                                            |        |                     |       

---

See
accompanying notes to consolidated condensed financial statements.

Page 4 of 26

---



NEOMAGIC CORPORATION  CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS  (In thousands)  (Unaudited)

|                                                                             |                                                      | Six Months Ended                  |        
|---------------------------------------------------------------------------- | ---------------------------------------------------- | --------------------------------- | -------
|
|Operating activities:                                                        |                                                      |                                   |        
|Net loss                                                                     |                                                      | $                                 | (13,028
|Adjustments to reconcile net loss to net cash used for operating activities: |                                                      |                                   |        
|                                                                             | Depreciation and amortization                        |                                   |        
|                                                                             | Loss on disposal of property, plant and equipment    |                                   |        
|                                                                             | Loss on restructuring of wafer purchase agreement    |                                   |        
|                                                                             | Income, net of expenses, from the sale of DVD assets |                                   |        
|                                                                             | Amortization of deferred compensation                |                                   |        
|                                                                             | Changes in operating assets and liabilities:         |                                   |        
|                                                                             |                                                      | Accounts receivable               |        
|                                                                             |                                                      | Inventory                         |        
|                                                                             |                                                      | Income tax receivable             |        
|                                                                             |                                                      | Other current assets              |        
|                                                                             |                                                      | Restricted cash                   |        
|                                                                             |                                                      | Other assets                      |        
|                                                                             |                                                      | Accounts payable                  |        
|                                                                             |                                                      | Compensation and related benefits |        
|                                                                             |                                                      | Income taxes payable              |        
|                                                                             |                                                      | Other accruals                    |        
|                                                                             |                                                      |                                   |        
|Net cash provided by (used for) operating activities                         |                                                      |                                   | 727    
|                                                                             |                                                      |                                   |        
|Investing activities:                                                        |                                                      |                                   |        
|                                                                             | Net proceeds from the sale of DVD assets             |                                   |        
|                                                                             | Purchases of property, plant and equipment           |                                   |        
|                                                                             | Purchases of short-term investments                  |                                   |        
|                                                                             | Maturities of short-term investments                 |                                   |        
|                                                                             |                                                      |                                   |        
|Net cash provided by investing activities                                    |                                                      |                                   | 7,179  
|                                                                             |                                                      |                                   |        
|Financing activities:                                                        |                                                      |                                   |        
|                                                                             | Repayment on note receivable from stockholders       |                                   |        
|                                                                             | Net proceeds from issuance of common stock           |                                   |        
|                                                                             |                                                      |                                   |        
|Net cash provided by financing activities                                    |                                                      |                                   | 488    
|                                                                             |                                                      |                                   |        
|Net increase (decrease) in cash and cash equivalents                         |                                                      |                                   | 8,394  
|Cash and cash equivalents at beginning of period                             |                                                      |                                   | 38,996 
|                                                                             |                                                      |                                   |        
|Cash and cash equivalents at end of period                                   |                                                      | $                                 | 47,390 
|                                                                             |                                                      |                                   |        
|Supplemental schedules of cash flow information:                             |                                                      |                                   |        
|Cash paid (received) during the period for:                                  |                                                      |                                   |        
|                                                                             | Interest                                             |                                   | $      
|                                                                             | Taxes                                                |                                   | $      

See
accompanying notes to consolidated condensed financial statements.

Page 5 of 26

---



NEOMAGIC CORPORATION  NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1.    Basis of Presentation:

The unaudited consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and
include the accounts of NeoMagic Corporation and its wholly owned subsidiaries collectively ("NeoMagic" or the "Company"). Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the financial
statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position at July 31, 2002, the operating results for the
three and six months ended July 31, 2002 and 2001, and the cash flows for the six months ended July 31, 2002 and 2001. These financial statements and notes should be read in conjunction
with the Company's audited financial statements and notes thereto for the year ended January 31, 2002, included in the Company's Form 10-K filed with the Securities and
Exchange Commission.

The
results of operations for the three and six months ended July 31, 2002 are not necessarily indicative of the results that may be expected for the year ending
January 31, 2003.

The
second fiscal quarters of 2003 and 2002 ended on July 28, 2002 and July 29, 2001, respectively. For ease of presentation, the accompanying financial statements have
been shown as ending on the last day of the calendar month of July.

2.    Recent Accounting Pronouncements:

NeoMagic adopted Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets," in the first quarter of fiscal 2003. The effect of
adopting SFAS 144 did not have a material impact on the Company's financial position or results of operations.

NeoMagic
adopted Statement of Financial Accounting Standards No. 141 (SFAS 141) Business Combinations, and Statement of Financial Accounting Standards No. 142
(SFAS 142) Goodwill and Other Intangible Assets, in the first quarter of fiscal 2003. The Company is testing goodwill for impairment using the two-step process prescribed in
SFAS 142. The Company has completed the first required impairment tests of goodwill and indefinite lived intangible assets as of February 1, 2002 and has determined there are indicators
of impairment. The second step of the test, which is to determine the amount of impairment, will be completed by the end of fiscal 2003. Any impairment charge resulting from this impairment test will
be reflected as the cumulative effect of a change in accounting principle in the second half of fiscal 2003. The Company has not yet determined the effect that the second step of the impairment test
will have on the financial statements.

In
July 2002, the FASB approved SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses the financial accounting and reporting for
obligations associated with an exit activity, including restructuring, or with a disposal of long-lived assets. Exit activities include, but are not limited to, eliminating or reducing
product lines, terminating employees and contracts and relocating plant facilities or personnel. SFAS No. 146 specifies that a company will record a liability for a cost associated with an exit
or disposal activity only when that liability is incurred and can be measured at fair value. Therefore, commitment to an exit plan or a plan of disposal expresses only management's intended future
actions and, therefore, does not meet the requirement for recognizing a liability and the related expense. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after
December 31, 2002, with earlier adoption encouraged. The Company

Page 6 of 26

---

does not anticipate that the adoption of SFAS No. 146 will have a material effect on its financial position or results of operations.

3.    Loss Per Share:

The following data show the amounts used in computing loss per share and the effect on the weighted-average number of shares of diluted potential common stock.

Per
share information calculated on this basis is as follows:

|                                 |                                                                                      | Three Months Ended
July 31, |      | Six Months Ended
July 31, |  
|-------------------------------- | ------------------------------------------------------------------------------------ | --------------------------- | ---- | ------------------------- | -
|
|
|Numerator:                       |                                                                                      |                             |      |                           |  
|                                 | Net loss                                                                             |                             | $    | (9,251                    | )
|Denominator:                     |                                                                                      |                             |      |                           |  
|                                 | Denominator for basic and diluted loss per shareweighted average shares outstanding |                             |      | 28,167                    |  
|Basic and diluted loss per share |                                                                                      | $                           | (.33 | )                         | $

For
the three months ended July 31, 2002 and July 31, 2001 and for the six months ended July 31, 2002 and July 31, 2001, respectively, basic earnings per
share equals diluted earnings per share due to the net loss for those periods.

4.    Divestitures:

In April 2000, pursuant to an asset purchase agreement, the Company sold the principal assets of the DVD product group to LSI Logic ("Buyer"). The assets
primarily consisted of fixed assets and intangible assets. In exchange for the assets sold to the Buyer, the Company received $11.7 million in a lump-sum cash payment. An additional
$2.3 million was contingent on the Company's performance of certain obligations related to the transfer of licenses with third parties to the Buyer. The Company wrote-off
approximately $3.6 million in capitalized intellectual property, fixed assets and prepaid expenses related to the DVD product group that was transferred to the Buyer. In addition, the Company
accrued approximately $0.6 million in transaction costs and approximately $2.3 million in retention packages for the affected employees during the first quarter of fiscal 2001. During
the second quarter of fiscal 2001, the Company incurred additional costs of $0.3 million. During the third quarter of fiscal 2001, the Company received a $1.5 million cash payment which
was previously contingent on the Company's performance of certain obligations related to the transfer of licenses with third parties
to the Buyer. As a result, the Company recorded a pre-tax gain of approximately $6.5 million on the sale, which is recorded in Income, net of expenses, from the sale of DVD assets
on the Consolidated Condensed Statements of Operations for the year ended January 31, 2001. In the first quarter of fiscal 2003, the Company received a $1.6 million cash payment
previously contingent on the transfer of licenses with third parties to the Buyer, which is recorded as a gain in the Consolidated Condensed Statements of Operations for the six months ended
July 31, 2002.

5.    Inventories:

Inventories are stated at the lower of cost or market value. Cost is determined by the first-in, first-out method. The Company writes down
the inventory value for estimated excess and obsolete inventory, based on management's assessment of future demand and market conditions. If actual future

Page 7 of 26

---

demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Inventory consists of:

July 31,
2002

January 31,
2002(in thousands)Raw materials

$
23

$
Work in process


34


Finished goods


197


78Total

$
254

$
78


6.    Accumulated Other Comprehensive Income:

Total accumulated other comprehensive income was $17 thousand at July 31, 2002 and $19 thousand at January 31, 2002. Accumulated other
comprehensive income consists entirely of unrealized gains on available for sale securities.

7.    Goodwill and Other Intangible Assets:

Effective February 1, 2002, NeoMagic adopted SFAS 142, which was issued by the Financial Accounting Standards Board in July 2001. Under this
standard, the Company ceased amortizing goodwill effective February 1, 2002. In addition, on adoption, the Company reclassified certain intangibles with net book value $383 thousand,
consisting of assembled workforce and acquisition costs, which are no longer defined as an acquired intangible under SFAS 142, to goodwill. Accordingly, there was no amortization of assembled
workforce and acquisition costs recognized during the six months ended July 31, 2002.

The
following table presents a reconciliation of previously reported net loss and net loss per share to the amounts adjusted to exclude goodwill and acquired workforce amortization (in
thousands, except per share data):

|                                      |                                | Three Months Ended
July 31, |   | Six Months Ended
July 31, |  
|------------------------------------- | ------------------------------ | --------------------------- | - | ------------------------- | -
|
|Net loss:                             |                                |                             |   |                           |  
|                                      | As reported                    |                             | $ | (9,251                    | )
|                                      | Goodwill amortization          |                             |   |                          |  
|                                      | Workforce amortization         |                             |   |                          |  
|                                      | Acquisition costs amortization |                             |   |                          |  
|                                      |                                |                             |   |                           |  
|                                      | As adjusted                    |                             | $ | (9,251                    | )
|                                      |                                |                             |   |                           |  
|Basic and diluted net loss per share: |                                |                             |   |                           |  
|                                      | As reported                    |                             |   | (0.33                     | )
|                                      | Goodwill amortization          |                             |   |                          |  
|                                      | Workforce amortization         |                             |   |                          |  
|                                      | Acquisition costs amortization |                             |   |                          |  
|                                      |                                |                             |   |                           |  
|                                      | As adjusted                    |                             | $ | (0.33                     | )
|                                      |                                |                             |   |                           |  

Page 8 of 26

---

Other
intangible assets subject to amortization were as follows (in thousands):

|July 31, 2002                  |  | Cost |       | Accumulated
Amortization |   | Net   
|------------------------------ |  | ---- | ----- | ------------------------ | - | ------
|Licensed intellectual property |  | $    | 2,331 |                          | $ |      
|Core technology                |  |      | 1,800 |                          |   | (350  
|Developed technology           |  |      | 900   |                          |   | (263  
|Customer relationships         |  |      | 700   |                          |   | (136  
|Patents                        |  |      | 1,690 |                          |   | (1,468
|Assembled workforce            |  |      |      |                          |   |      
|Acquisition costs              |  |      |      |                          |   |      
|Other                          |  |      | 107   |                          |   | (29   
|                               |  |      |       |                          |   |       
|                               |  | $    | 7,528 |                          | $ | (2,246
|                               |  |      |       |                          |   |       

|January 31, 2002               |  | Cost |       | Accumulated
Amortization |   | Net   
|------------------------------ |  | ---- | ----- | ------------------------ | - | ------
|Licensed intellectual property |  | $    | 1,811 |                          | $ | (327  
|Core technology                |  |      | 1,800 |                          |   | (49   
|Developed technology           |  |      | 900   |                          |   | (38   
|Customer relationships         |  |      | 700   |                          |   | (19   
|Patents                        |  |      | 1,690 |                          |   | (1,256
|Assembled workforce            |  |      | 1,179 |                          |   | (885  
|Acquisition costs              |  |      | 354   |                          |   | (265  
|Other                          |  |      | 114   |                          |   | (4    
|                               |  |      |       |                          |   |       
|                               |  | $    | 8,548 |                          | $ | (2,843
|                               |  |      |       |                          |   |       

Amortization
expense for other intangible assets was $439 and $779 for the three and six months ended July 31, 2002, respectively. The Company wrote off licensed intangible
properties with a cost of $1,484 and accumulated amortization of $327 for licensed intellectual property that was no longer used by the Company in the first quarter of fiscal 2003. The estimated
annual amortization expense for other intangible assets is $896 for the remaining two quarters of fiscal 2003, $2,069 for the fiscal year ended January 31, 2004, $1,541 for the fiscal year
ended January 31, 2005, and $776 for the fiscal year ended January 31, 2006.

The
Company is testing goodwill for impairment using the two-step process prescribed in SFAS 142. The Company has completed the first required impairment tests of
goodwill and indefinite lived intangible assets as of February 1, 2002 and has determined that there are indicators of impairment. The second step of the test, which is to determine the amount
of impairment, will be completed by the end of fiscal 2003. Any impairment charge resulting from this impairment test will be reflected as the cumulative effect of a change in accounting principle in
the second half of fiscal 2003. The Company has not yet determined the effect that the second step of the impairment test will have on the financial statements.

8.    Wafer Purchase Agreement Restructuring Liability:

In January 2001, the Company extended its wafer supply agreement with Infineon Technologies AG of Germany ("Infineon") through fiscal 2004 to ensure future
wafer supply for the Company's new product efforts. The terms of the agreement provided that NeoMagic would make use of Infineon's 0.20 micron and 0.17 micron embedded DRAM (eDRAM) process
technologies. The agreement also provided for access to additional capacity and to more advanced process technologies to be developed by Infineon. NeoMagic provided $15 million in guarantees
towards its wafer purchases over the term of

Page 9 of 26

---

the agreement. The amount of guarantee is included as restricted cash on the balance sheet at January 31, 2002. At the end of fiscal year 2002, due to uncertainties over Infineon's continued
eDRAM product development, the Company decided not to use Infineon's eDRAM technology for its future production. Discussions commenced between NeoMagic and Infineon on restructuring the wafer supply
agreement with the intent to release NeoMagic from the related guarantee. Based on the progression
of the negotiations, the Company has recorded special charges of $1.4 million and $1.1 million respectively during the first and second quarters of fiscal 2003, which represented the
value of the settlement offered at that time. Subsequent to the second quarter of fiscal 2003, the Company and Infineon signed an Agreement to settle the contingency based on negotiations that
occurred in September 2002. The Company adjusted the wafer purchase agreement restructuring liability by an additional $1.1 million to $3.6 million to reflect the value of the
final settlement. These amounts are shown on the Consolidated Condensed Statements of Operations as a special charge for the three and six months ended July 31, 2002. On September 10,
2002 the Company paid $1.5 million in cash and issued 1.7 million shares of common stock to settle the claim under the agreement. As a result of the settlement, $15.0 million of
restricted cash was released and reclassified to cash and cash equivalents on the Consolidated Condensed Balance Sheet at July 31, 2002.

9.    Unaudited Pro Forma Information:

The consolidated statements of operations of NeoMagic presented throughout this report include the operating results of LinkUp Systems from the date of
acquisition, December 18, 2001. The following pro forma information for the six months ended July 31, 2001 is presented as if the acquisition of LinkUp was consummated at the beginning
of fiscal 2002. This unaudited pro forma data does not purport to represent the Company's actual results of operations had the LinkUp acquisition occurred at the beginning of fiscal 2002 and should
not serve as a forecast of the Company's operating results for any future periods.

The
pro forma information for July 31, 2001 is based on historical results of operations of NeoMagic for the six-month period ended July 31, 2001 and historical
results of LinkUp from January 1, 2001 to July 31, 2001 (in thousands, except per share data).

|                                               |  | Three Months Ended
July 31, 2001 |        | Six Months Ended
July 31, 2001 |  
|---------------------------------------------- |  | -------------------------------- | ------ | ------------------------------ | -
|Pro forma net sales                            |  | $                                | 641    |                                | $
|Pro forma net loss                             |  | $                                | (8,687 | )                              | $
|Pro forma basic and diluted net loss per share |  | $                                | (0.31  | )                              | $

Page 10 of 26

---



Part I.    Financial Information

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

When used in this discussion, the words "expects," "anticipates," "believes" and similar expressions are intended to identify forward-looking statements. Such
statements reflect management's current intentions and expectations. However, actual events and results could vary significantly based on a variety of factors including, but not limited to: customer
acceptance of new NeoMagic products, the market acceptance of handheld system products developed and marketed by customers which use the Company's products, the Company's ability to execute product
development plans on schedule, and the Company's ability to access advanced manufacturing technologies in sufficient capacity. These factors along with those set forth below under "Factors that May
Affect Future Results," are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These forward-looking statements speak only as of the date
hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein, to reflect any changes in the
Company's expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based.

Overview

NeoMagic develops and sells applications processors to enable new generations of handheld systems, offering low power, small form-factor, and high
performance multimedia features and performance. Previously, the Company provided semiconductor solutions for the Notebook PC Multimedia Accelerator marketplace. In April 2000, the Company
announced its intention to exit this market and is now focused solely on developing, manufacturing and selling applications processors for the Handheld Systems market. The Company has recently begun
to generate revenues from this new product effort. Throughout the year, the Company expects to see customers introducing new handheld systems that use the Company's chips, primarily in Japan, Europe,
and the Far East. The Company also expects to launch additional new members of its MiMagic family of applications processors as fiscal 2003 and fiscal 2004 progresses. The Company
anticipates growth in sales for each successive quarter of the fiscal year.

NeoMagic
has established strategic relationships with third-party manufacturing partners to produce semiconductor products for the Company. Pursuant to these strategic relationships,
NeoMagic designs the overall product, including the logic and analog circuitry, and the manufacturing partners manufacture the wafers, perform testing and package the products. NeoMagic is focused on
leveraging its core competencies in integrating logic, analog and memory, along with graphics, video, 3D and other multimedia technologies, drivers, middleware and operating system software, and power
management in its continued development of solutions that facilitate the mobilization of multimedia applications.

The
Company's fiscal year end is January 31. Any references herein to a fiscal year refer to the year ended January 31 of such year. The second fiscal quarters of 2003 and
2002 ended on July 28, 2002 and July 29, 2001, respectively. For ease of presentation, the accompanying financial statements have been shown as ending on the last day of the calendar
month of July.

Results of Operations

Critical Accounting Policies

The process of preparing financial statements requires the use of estimates on the part of the Company's management. The estimates used by management are based on
the Company's historical experiences combined with management's understanding of current facts and circumstances. Certain of the Company's accounting policies are considered critical as they are both
important to the portrayal of its financial condition and results and require significant or complex judgment on the part of

Page 11 of 26

---

management. For a description of what we believe to be the Company's most critical accounting policies and estimates, refer to the Company's Annual Report on Form 10-K for the year
ended January 31, 2002 filed with the Securities and Exchange Commission. There have been no changes in any of our accounting policies since January 31, 2002.

Net sales

Net sales were $494 thousand and $856 thousand for the three months and six months ended July 31, 2002, respectively, compared to
$188 thousand and $268 thousand for the three months and six months ended July 31, 2001. Net sales increased due to the Company's shipments of its new applications processors for
the Handheld Systems market in the three months and six months ended July 31, 2002. Sales for the six months ended July 31, 2001 were of the Company's legacy notebook products.

Sales
to customers located outside the United States (including sales to the foreign operations of customers with headquarters in the United States, and foreign system manufacturers that
sell to United States-based OEMs) accounted for 94% and 100% of net sales in the three months ended July 31, 2002 and 2001, respectively. Export sales accounted for 89% and 98% of net sales in
the six months ended July 31, 2002 and 2001, respectively. All sales transactions were denominated in United States dollars.

Three
customers accounted for 46%, 27% and 16% of net sales for the three months ended July 31, 2002. Two customers accounted for 77% and 20% of net sales in the three months
ended July 31, 2001. Three customers accounted for 28%, 26%, and 25% of net sales for the six months ended July 31, 2002. Three customers accounted for 54%, 23%, and 14% of net sales for
the six months ended July 31, 2001.

Gross Margin (loss)

Gross margin (loss) were $(226) thousand and $188 thousand for the three months ended July 31, 2002 and 2001, respectively. Gross margin
(loss) was $(449) thousand and $261 thousand in the six months ended July 31, 2002 and 2001, respectively. The negative gross margins in the three and six month periods ended
July 31, 2002 are due to under absorption of manufacturing overhead resulting from low production levels. The Company's sales in the three and six month periods ended July 31, 2001 were
of its fully reserved legacy notebook products.

Research and Development Expenses

Research and development expenses include compensation and associated costs relating to development personnel, operating system software costs and prototyping
costs, which are comprised of photomask costs, pre-production wafer costs, and amortization of intangibles relating to development stage products. Research and development expenses were
$5.5 million and $6.1 million for the three months ended July 31, 2002 and 2001, respectively. Research and development expenses were $12.5 million and $13.3 million
for the six months ended July 31, 2002 and 2001, respectively. These expenses include amortization of deferred compensation of $0.1 million and $0.5 million for the three months
ended July 31, 2002 and 2001, respectively and $0.8 million and $1.0 million for the six months ended July 31, 2002 and 2001, respectively. The decreases of
$0.6 million and $0.8 million in total research and development expenses for the three months and six months ended July 31, 2002 are primarily related to lower consulting costs
offset somewhat by increased amortization of acquired and licensed intangibles relating to products which are under research and development stage. Included in the expenses for the six months ended
July 31, 2002, were expenses of $0.6 million to write off certain Licensed Intellectual Property. The Company has made, and intends to continue to make, significant investments in
research and development as it focuses on developing products for the Handheld Systems market.

Page 12 of 26

---

Sales, General and Administrative Expenses

Sales, general and administrative expenses were $2.3 million and $2.1 million for the three months ended July 31, 2002 and 2001,
respectively. Sales, general and administrative expenses were $5.7 million and $3.9 million for the six months ended July 31, 2002 and 2001, respectively. These expenses include
amortization of deferred compensation of $0.2 million and $0.1 million for the three months ended July 31, 2002 and 2001, respectively and $0.8 million and
$0.2 million for the six months ended July 31, 2002 and 2001, respectively. Sales, general and administrative expenses increased in absolute dollars due primarily to increased sales
expenses related to the Company's new product efforts for the Handheld Systems market as well as increased amortization of deferred compensation resulting from the acquisition of LinkUp Systems in
December 2001.

Special Charges

In January 2001, the Company extended its wafer supply agreement with Infineon Technologies AG of Germany ("Infineon") through fiscal 2004 to ensure future
wafer supply for the Company's new product efforts. The terms of the agreement provided that NeoMagic would make use of Infineon's 0.20 micron and 0.17 micron embedded DRAM (eDRAM) process
technologies. The agreement also provided for access to additional capacity and to more advanced process technologies to be developed by Infineon. NeoMagic provided $15 million in guarantees
towards its wafer purchases over the term of the agreement. The amount of guarantee is included as restricted cash on the balance sheet at January 31, 2002. At the end of fiscal year 2002, due
to uncertainties over Infineon's continued eDRAM product development, the Company decided not to use Infineon's eDRAM technology for its future production. Discussions commenced between NeoMagic and
Infineon on restructuring the wafer supply agreement with the intent to release NeoMagic from the related guarantee. Based on the progression of the negotiations, the Company has recorded special
charges of $1.4 million and $1.1 million respectively during the first and second quarters of fiscal 2003, which represented the value of the settlement offered at that time. Subsequent
to the second quarter of fiscal 2003, the Company and Infineon signed an Agreement to settle the contingency based on negotiations that occurred in September 2002. The Company adjusted the
wafer purchase agreement restructuring liability by an additional $1.1 million to $3.6 million to reflect the value of the final settlement. These amounts are shown on the Consolidated
Condensed Statements of Operations as a special charge for the three and six months ended July 31, 2002. On September 10, 2002 the Company paid $1.5 million in cash and issued
1.7 million shares of common stock to settle the claim under the agreement. As a result of the settlement, $15.0 million of restricted cash was released and reclassified to cash and cash
equivalents on the Consolidated Condensed Balance Sheet at July 31, 2002.

Income Net of Expenses from Sale of DVD Assets

In April 2000, pursuant to an asset purchase agreement, the Company sold the principal assets of the DVD product group to LSI Logic ("Buyer"). The assets
primarily consisted of fixed assets and intangible assets. In exchange for the assets sold to the Buyer, the Company received $11.7 million in a
lump-sum cash payment. An additional $2.3 million was contingent on the Company's performance of certain obligations related to the transfer of licenses with third parties to the
Buyer. The Company wrote-off approximately $3.6 million in capitalized intellectual property, fixed assets and prepaid expenses related to the DVD product group that was transferred
to the Buyer. In addition, the Company accrued approximately $0.6 million in transaction costs and approximately $2.3 million in retention packages for the affected employees during the
first quarter of fiscal 2001. During the second quarter of fiscal 2001, the Company incurred additional costs of $0.3 million. During the third quarter of fiscal 2001, the Company received a
$1.5 million cash payment which was previously contingent on the Company's performance of certain obligations related to the transfer of licenses with third parties to the Buyer. As a result,
the Company recorded a pre-tax gain of approximately $6.5 million on the

Page 13 of 26

---

sale, which is recorded in Income, net of expenses, from the sale of DVD assets on the Consolidated Condensed Statements of Operations for the year ended January 31, 2001. In the first quarter
of fiscal 2003, the Company received a $1.6 million cash payment previously contingent on the transfer of licenses with third parties to the Buyer, which is recorded as a gain in the
Consolidated Condensed Statements of Operations for the three months ended April 30, 2002.

Interest and Other Income

The Company earns interest on its cash equivalents, short-term investments, and restricted cash. Interest and other income was $0.7 million and
$0.8 million for the three months ended July 31, 2002 and 2001, respectively. Interest and other income was $1.3 million and $2.1 million for the six months ended
July 31, 2002 and 2001, respectively. The decrease in interest and other income is primarily due to significantly lower interest rates and to lower cash balances.

Interest Expense

Interest expense was $0 and $0 for the three months ended July 31, 2002 and 2001, respectively. Interest expense was $0 and $11,000 for the six months
ended July 31, 2002 and 2001, respectively. Interest expense for the Company is not significant since the Company does not have any debt instruments outstanding.

Income Taxes

The Company recorded a $6.3 million tax benefit in the six months ended July 31, 2002, primarily related to changes in the federal tax law. The Job
Creation and Worker Assistance Act of 2002 was enacted on March 9, 2002 and contained provisions extending the net loss carry-back period from two to five years. This change will
permit the Company to utilize net operating losses incurred in fiscal 2002 to recover taxes paid in prior periods. The $6.3 million benefit represents additional refunds that the Company
expects to claim on the 2002 net operating loss carry-back due to the change in tax law.

Liquidity and Capital Resources

The Company's cash, cash equivalents and short-term investments increased $2.0 million in the six months ended July 31, 2002 to
$73.9 million from $71.9 million at January 31, 2002.

Cash
and cash equivalents provided by operating activities for the six months ended July 31, 2002 was $0.7 million, compared to $24.3 million of net cash used in
operating activities for the six months ended July 31, 2001. The cash provided by operating activities stems primarily from non-cash depreciation and deferred compensation
amortization charges, a decrease in restricted cash and other current assets, and increases in the wafer purchase agreement restructuring liability, accounts payable, and compensation and related
benefits partially offset by a net loss of $13.0 million, increases in income taxes receivable and accounts receivable, as well as decreases in income taxes payable and in other accruals.

Net
cash provided by investing activities for the six months ended July 31, 2002, was $7.2 million, compared to $3.0 million of net cash provided by investing
activities for the six months ended July 31, 2001. Net cash provided by investing activities for the six months ended July 31, 2002 related primarily to net proceeds from the maturities
of short-term investments of $6.4 million and proceeds from the sale of DVD assets of $1.6 million, partially offset by purchases of property, plant and equipment of
$0.8 million.

Net
cash provided by financing activities was $0.5 million for the six months ended July 31, 2002, compared to $0.6 million of net cash provided by financing
activities for the six months ended July 31,

Page 14 of 26

---

2001. The net cash provided by financing activities primarily represents net proceeds from the issuance of common stock.

At
July 31, 2002, the Company's principal sources of liquidity included cash, cash equivalents and short-term investments of $73.9 million. The Company believes
that it will not generate cash from operations during the next twelve months. The Company believes the current cash, cash equivalents and short-term investments will satisfy the Company's
projected working capital and capital expenditure requirements through the next twelve months. After this period, capital requirements will depend on many factors, including general economic
conditions, the rate of net sales, the timing and extent of spending to support research and development programs, the timing of any new product introductions and enhancements to existing products,
and market acceptance of the Company's products. To the extent that existing cash, cash equivalents and short-term investment balances and any cash from operations are insufficient to fund
the Company's future activities, the Company may need to raise additional equity or debt financing in the future. There can be no assurance that additional equity or debt financing, if required, will
be available on acceptable terms or at all.

In
January 2001, the Company extended its wafer supply agreement with Infineon Technologies AG of Germany "("Infineon") through fiscal 2004 to ensure future wafer supply for the
Company's new product efforts. The terms of the agreement provided that NeoMagic would make use of Infineon's 0.20 micron and 0.17 micron embedded DRAM (eDRAM) process technologies. The agreement also
provided for access to additional capacity and to more advanced process technologies to be developed by Infineon. NeoMagic provided $15 million in guarantees towards its wafer purchases over
the term of the agreement. The amount of guarantee is included as restricted cash on the balance sheet at January 31, 2002. At the end of fiscal year 2002, due to uncertainties over Infineon's
continued eDRAM product development, the Company decided not to use Infineon's eDRAM technology for its future production. Discussions commenced between NeoMagic and Infineon on restructuring the
wafer supply agreement with the intent to release NeoMagic from the related guarantee. Based on the progression of the negotiations, the Company has recorded special charges of $1.4 million and
$1.1 million respectively during the first and second quarters of fiscal 2003, which represented the value of the settlement offered at that time. Subsequent to the second quarter of fiscal
2003, the Company and Infineon signed an Agreement to settle the contingency based on negotiations that occurred in September 2002. The Company adjusted the wafer purchase agreement
restructuring liability by an additional $1.1 million to $3.6 million to reflect the value of the final settlement. These amounts are shown on the Consolidated Condensed Statements of
Operations as a special charge for the three and six months ended July 31, 2002. On September 10, 2002 the Company paid $1.5 million in cash and issued 1.7 million shares
of common stock to settle the claim under the agreement. As a result of the settlement, $15.0 million of restricted cash was released and reclassified to cash and cash equivalents on the
Consolidated Condensed Balance Sheet at July 31, 2002.

Page 15 of 26

---

The
Company leases offices in Santa Clara, California, India and Israel under operating leases that expire at various times through April 2010. Future minimum lease payments under
non-cancelable operating leases as of July 31, 2002 are as follows:

Fiscal year ending January 31:
(in thousands)2003*

$
1,0652004*


1,1852005


1,0572006


1,0832007


1,095Thereafter


3,497Total minimum lease payments

$
8,982


---

Factors that May Affect Future Results

Our Annual and Quarterly Performance May Fluctuate

The Company's quarterly and annual results of operations are affected by a variety of factors that could materially adversely affect net sales, gross margin and
operating results. These factors include, among others, the ability of the Company to increase its customer base and its sales, the abilities of manufacturing subcontractors to make adequate and
timely deliveries, access to advanced production process technologies from manufacturing subcontractors, recruiting and retaining employees including those with engineering expertise in new
disciplines. In particular, the Company's new product development efforts and customer engagements in System-on-Chip integration and supporting multimedia technologies such as
MPEG-4 streaming video represent new endeavors and consequently carry greater risks of successful and timely execution. Any one or more of these factors could result in the Company failing
to achieve its expectations as to future revenues and profits. Furthermore, the majority of the Company's sales were historically made, and are expected to continue to be made, on the basis of
purchase orders rather than pursuant to long-term purchase agreements, which increases the difficulty of forecasting sales. The Company may be unable to adjust spending sufficiently in a
timely manner to compensate for any unexpected sales shortfall, which could materially adversely affect quarterly operating results. Accordingly, the Company believes that
period-to-period comparisons of its operating results should not be relied upon as an indication of future performance. In addition, the results of any quarterly period are not
indicative of results to be expected for a full fiscal year. In future quarters, the Company's operating results may be below the expectations of public market analysts or investors. Since the
Company's announcement of its restructuring in April of 2000, and of its expectation of declining revenues, gross margins and operating results, the market price of the Common Stock has been and is
expected to be for some time in the future, materially adversely affected.

We have a Limited Customer Base

The Company's sales were historically concentrated within a limited customer base in the notebook PC market. The Company has now exited the notebook PC market and
is generating revenues from products for the Handheld Systems market. The Company expects to have commitments from only a limited number of customers during fiscal 2003. The Company expects that a
small number of customers will account for a substantial portion of its net sales for the foreseeable future. As a result, the Company's business, financial condition and results of operations could
be materially adversely affected by the decision of a single customer to cease using the Company's products, or by a decline in the number of Handheld Systems sold by a single customer.

Page 16 of 26

---



We May Lose Our Customer Base

The Company's products are designed to afford the Handheld Systems manufacturer significant advantages with respect to product performance, power consumption and
size. To the extent that other future developments in components or subassemblies incorporate one or more of the advantages offered by the Company's products, the market demand for the Company's
products may be negatively impacted.

We Face Intense Competition in Our Markets

The market for semiconductor solutions for Handheld Systems, in which the Company is now focused, is intensely competitive and is characterized by rapid
technological change, evolving industry standards and declining average selling prices. NeoMagic believes that the principal factors of competition in this market are performance, price, features,
power consumption, size and software support. The ability of the Company to compete successfully in this new rapidly evolving Handheld Systems market depends on a number of factors including, success
in designing and subcontracting the manufacture of new products that implement new technologies, product quality and reliability, price, the efficiency of production, ramp up of production of the
Company's products for particular system manufacturers, end-user acceptance of the system manufacturers' products, market acceptance of competitors' products, NeoMagic's ability to provide
appropriate applications software support, and general economic conditions.

NeoMagic
competes with major domestic and international companies, some of which have substantially greater financial and other resources than the Company with which to pursue
engineering, manufacturing, marketing and distribution of their products. The Company's principal competitors include Intel's StrongARM and XScale product lines, Texas Instruments' OMAP product line,
and a number of vertically integrated electronics firms who are developing their own solutions. NeoMagic may also face increased competition from new entrants into the Handheld Systems Semiconductor
market including companies currently at developmental stages. Certain of the Company's competitors may offer products with more functionality and or higher processor speeds at the expense of battery
life and power consumption than the Company's product offerings. Although current products for Handheld Systems do not utilize embedded DRAM, the Company's product developments may utilize embedded
DRAM technologies to produce System-on-Chip technology for a portion of future product efforts. NeoMagic has significant intellectual properties and historically demonstrated
expertise in this technology. The Company is now also exploring alternative technologies such as Multi-Chip module ("MCM") solutions and other packaging related approaches to combining
multiple chips. The
successful commercial introduction by competitors of products that integrate DRAM with analog and logic circuitry on a single chip, or the inability of the Company to produce products for their new
market, could have a material adverse effect on the Company's business, financial condition and operating results.

Some
of the Company's current and potential competitors operate their own manufacturing facilities. Since the Company does not operate its own manufacturing facility and may from
time-to-time make binding commitments to purchase products, it may not be able to reduce its costs and cycle time or adjust its production to meet changing demand as rapidly as
companies that operate their own facilities, which could have a material adverse effect on the Company's business, financial condition and results of operations.

Our Products May be Incompatible with Evolving Industry Standards and Market Trends

The Company's ability to compete in the future will also depend on its ability to identify and ensure compliance with evolving industry standards and market
trends. Unanticipated changes in market trends and industry standards could render the Company's products incompatible with products

Page 17 of 26

---

developed by major hardware manufacturers and software developers. As a result, the Company could be required to invest significant time and resources to redesign its products or obtain license
rights to technologies owned by third parties in order to ensure compliance with relevant industry standards and market trends. There can be no assurance that the Company will be able to redesign its
products or obtain the necessary third-party licenses within the appropriate window of market demand. If the Company's products are not in compliance with prevailing market trends and industry
standards for a significant period of time, the Company could miss crucial OEM design cycles, which could result in a material adverse effect on the Company's business, financial condition and results
of operations.

We Depend on New Product Development to Meet Rapid Market and Technological Change

The Company is now focused on providing high-performance semiconductor solutions for sale to original equipment manufacturers of Handheld Systems. New
product planning is primarily focused on application processors for Handheld Systems, and multimedia technologies for integration into such processors, such as MPEG-4 video compression,
image processing, graphics, and audio technologies. The Company's future business, financial condition and results of operations will depend to a significant extent on its ability to develop new
products that address these market opportunities. As a result, the Company believes that significant expenditures for research and development will continue to be required in the future.

The
markets for Handheld Systems are emerging opportunities, characterized by rapidly changing infrastructure, evolving industry standards and uncertain average selling prices. The
Company must
anticipate the features and functionality that consumers and infrastructure providers will demand, incorporate those features and functionality into products that meet the exacting design requirements
of equipment manufacturers, price its products competitively and introduce the products to the market on a timely basis. The success of new product introductions is dependent on several factors,
including proper new product definition, timely completion and introduction of new product designs, the ability to create or acquire Intellectual Property, the ability of strategic manufacturing
partners to effectively design and implement the manufacture of new products, quality of new products, differentiation of new products from those of the Company's competitors and market acceptance of
the Company's and its customers' products. There can be no assurance that the products the Company expects to introduce will incorporate the features and functionality demanded by system manufacturers
and consumers, will be successfully developed, or will be introduced within the appropriate window of market demand, nor can there be assurance that customers who utilize the Company's semiconductor
products will achieve the levels of market success with their own system products that they may project to the Company.

Because
of the complexity of its products, the Company has experienced delays from time to time in completing development and introduction of new products. In addition, the Company is
producing and continuing the development of new products in markets in which the Company has little history. In the event that there are delays in ramping production of current products, or in the
completion of development of future products, including the products currently under development for introduction over the next 12 to 18 months, the Company's potential future business,
financial condition, and results of operations will be materially adversely affected. In addition, the time required for competitors to develop and introduce competing products may be shorter,
manufacturing yields may be better, and production costs may be lower than those experienced by the Company.

The
Company has exited the Notebook PC market and is generating revenues from its Handheld System products. Until the Company achieves substantial growth in revenue, it will continue to
incur substantial losses. There is no assurance as to how quickly revenues will grow.

Page 18 of 26

---

We Depend on Third-Party Manufacturers to Produce Our Products

The Company's products require wafers manufactured with state-of-the-art fabrication equipment and techniques. The Company
currently utilizes several foundries for wafer fabrication. The Company expects that, for the foreseeable future, some of its products will be manufactured by a single source. Since, in the Company's
experience, the lead time needed to establish a strategic relationship with a new wafer fabrication partner is at least 12 months, and the estimated time for a foundry to switch to a new
product line ranges from four to nine months, there may be no readily available alternative source of supply for specific products.    A manufacturing disruption experienced by the
Company's manufacturing partners, the failure of the Company's manufacturing partners to dedicate adequate resources to the production of the Company's products, or the financial instability of the
Company's manufacturing partners would have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, in the event that the transition to the
next generation
of manufacturing technologies by the Company's manufacturing partner is unsuccessful, the Company's business, financial condition and results of operations would be materially and adversely affected.

There
are many other risks associated with the Company's dependence upon third party manufacturers, including: reduced control over delivery schedules, quality, manufacturing yields and
cost; the potential lack of adequate capacity during periods of excess demand; limited warranties on wafers supplied to the Company; and potential misappropriation of NeoMagic's intellectual property.
The Company is dependent on its manufacturing partners to produce wafers with acceptable quality and manufacturing yields, deliver those wafers on a timely basis to the Company's third party assembly
subcontractors and to allocate to the Company a portion of their manufacturing capacity sufficient to meet the Company's needs. Although the Company's products are designed using the process design
rules of the particular manufacturer, there can be no assurance that the Company's manufacturing partners will be able to achieve or maintain acceptable yields or deliver sufficient quantities of
wafers on a timely basis or at an acceptable cost. Additionally, there can be no assurance that the Company's manufacturing partners will continue to devote adequate resources to the production of the
Company's products or continue to advance the process design technologies on which the manufacturing of the Company's products are based.

We Rely on Third-Party Subcontractors to Assemble and Test Our Products

The Company's products are assembled and tested by third party subcontractors. The Company does not have long-term agreements with any of these
subcontractors. Such assembly and testing is conducted on a purchase order basis. As a result of its reliance on third party subcontractors to assemble and test its products, the Company cannot
directly control product delivery schedules, which could lead to product shortages or quality assurance problems that could increase the costs of manufacturing or assembly of the Company's products.
Due to the amount of time normally required to qualify assembly and test subcontractors, product shipments could be delayed significantly if the Company were required to find alternative
subcontractors. Any problems associated with the delivery, quality or cost of the assembly and test of the Company's products could have a material adverse effect on the Company's business, financial
condition and results of operations.

We May Encounter Inventory Excess or Shortage

The Company has wafer supply relationships with several foundries to support the Company's product efforts. Normally, the Company is obligated to provide rolling
12-month forecasts of anticipated purchases and to place binding purchase orders three to four months prior to shipment. The Company orders wafers for deliveries at least three to five
months in advance and with the additional time to assemble and test wafers, the Company can have orders for finished goods that will not be available for up to six months into the future. If the
Company does not have sufficient demand for its products and cannot cancel its current and future commitments without material impact, the

Page 19 of 26

---

Company may experience excess inventory, which will result in a write-off affecting gross margin and results of operations. If the Company cancels a purchase order, it must pay
cancellation penalties based on the status of work in process or the proximity of the cancellation to the delivery date. Forecasts of monthly purchases may not increase or decrease by more than a
certain percentage from the previous month's forecast without the manufacturer's consent. Thus, the Company must make forecasts and place purchase orders for wafers before it receives purchase orders
from its own customers. This limits the Company's ability to react to fluctuations in demand for its products, which can be unexpected and dramatic, and from time-to-time will
cause the Company to have an excess or shortage of wafers for a particular product.    As a result of the long lead-time for manufacturing wafers and the increase in "just in
time" ordering by manufacturers, semiconductor companies such as the Company from time-to-time must take charges for excess inventory. The Company did in fact incur such
charges in fiscal 2001 of $9.2 million. Significant write-offs of excess inventory have had and could continue to have a material adverse effect on the Company's financial condition
and results of operations. Conversely, failure to order sufficient wafers would cause the Company to miss revenue opportunities and, if significant, could impact sales by the Company's customers,
which could adversely affect the Company's customer relationships and thereby materially adversely affect the Company's business, financial condition and results of operations.

Our Manufacturing Yields May Fluctuate

The fabrication of semiconductors is an extremely complex process, which typically includes hundreds of process steps. Minute levels of contaminants in the
manufacturing environment, defects in masks used to print circuits on a wafer, utilization of equipment with variations and numerous other factors can cause a substantial percentage of wafers to be
rejected or a significant number of die on each wafer to be nonfunctional. Many of these problems are difficult to diagnose and time consuming or expensive to remedy. As a result, semiconductor
companies often experience problems in achieving acceptable wafer manufacturing yields, which are represented by the number of good die as a proportion of the total number of die on any particular
wafer. The Company purchases wafers, not die, and pays an agreed upon price for wafers meeting certain acceptance criteria. Accordingly, the Company bears the risk of the yield of good die from wafers
purchased meeting the acceptance criteria. The Company experienced such yield problems in fiscal 2000, which materially adversely affected the Company's net sales, gross margins and results of
operations in fiscal 2000 and 2001.

Semiconductor
manufacturing yields are a function of both product design, which is developed largely by the Company, and process technology, which is typically proprietary to the
manufacturer. Historically, the Company has experienced lower yields on new products. Since low yields may result from either design or process technology failures, yield problems may not be
effectively determined or resolved until an actual product exists that can be analyzed and tested to identify process sensitivities relating to the design rules that are used. As a result, yield
problems may not be identified until well into the production process, and resolution of yield problems would require cooperation by and communication between the Company and the manufacturer. This
risk is compounded by the offshore location of the Company's manufacturers, increasing the effort and time required identifying, communicating and resolving manufacturing yield problems. As the
Company's relationships with new manufacturing partners develop, yields could be adversely affected due to difficulties associated with adopting the Company's technology and product design to the
proprietary process technology and design rules of each manufacturer. Any significant decrease in manufacturing yields could result in an increase in the Company's per unit product cost and could
force the Company to allocate its available product supply among its customers, potentially adversely impacting customer relationships as well as
revenues and gross margins. There can be no assurance that the Company's manufacturers will achieve or maintain acceptable manufacturing yields in the future.

Page 20 of 26

---

Uncertainty and Litigation Risk Associated with Patents and Protection of Proprietary Rights

The Company relies in part on patents to protect its intellectual property. As of July 31, 2002 the Company has been issued 59 patents, each covering
certain aspects of the design and architecture of the Company's products. Additionally, the Company has numerous patent applications pending. There can be no assurance that the Company's pending
patent applications, or any future applications will be approved. Further, there can be no assurance that any issued patents will provide the Company with significant intellectual property protection,
competitive advantages, or will not be challenged by third parties, or that the patents of others will not have an adverse effect on the Company's ability to do business. In addition, there can be no
assurance that others will not independently develop similar products, duplicate the Company's products or design around any patents that may be issued to the Company.

The
Company also relies on a combination of mask work protection, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements and licensing arrangements
to protect its intellectual property. Despite these efforts, there can be no assurance that others will not independently develop substantially equivalent intellectual property or otherwise gain
access to the Company's trade secrets or intellectual property, or disclose such intellectual property or trade secrets, or that the Company can meaningfully protect its intellectual property. A
failure by the Company to meaningfully protect its intellectual property could have a material adverse effect on the Company's business, financial condition and results of operations.

As
a general matter, the semiconductor industry is characterized by substantial litigation, regarding patent and other intellectual property rights. In December 1998, the Company
filed a lawsuit in the United States District Court for the District of Delaware against Trident Microsystems, Inc. The suit alleges that Trident's embedded DRAM graphics accelerators infringe
certain patents held by the Company. In January 1999, Trident filed a counter claim against the Company alleging an attempted monopolization in violation of antitrust laws, arising from
NeoMagic's filing of the patent infringement action against Trident. The Court ruled that there was no infringement by Trident. The Company filed an appeal in the United States Court of Appeals for
the Federal Circuit. On April 17, 2002, the United States Court of Appeals for the Federal Circuit affirmed the lower court's judgment of non-infringement on one patent and vacated
the courts judgment of non-infringement of another patent, thereby remanding it to the lower court for further proceedings. Management believes the Company has valid defenses against
Trident's claims. There can be no assurance as to the results of the patent infringement suit and the counter-suit for antitrust filed by Trident.

Any
patent litigation, whether or not determined in the Company's favor or settled by the Company, would at a minimum be costly and could divert the efforts and attention of the
Company's management and technical personnel from productive tasks, which could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no
assurance that current or future infringement claims by third parties or claims for indemnification by other customers or end users of the Company's products resulting from infringement claims will
not be asserted in the future or that such assertions, if proven to be true, will not materially adversely affect the Company's business, financial condition and results of operations. In the event of
any adverse ruling in any such matter, the Company could be required to pay substantial damages, which could include treble damages, cease the manufacturing, use and sale of infringing products,
discontinue the use of certain processes, or to obtain a license under the intellectual property rights of the third party claiming infringement. There can be no assurance, however, that a license
would be available on reasonable terms or at all. Any limitations on the Company's ability to market its products, or delays and costs associated with redesigning its products or payments of license
fees to third parties, or any failure by the Company to develop or license a substitute technology on commercially reasonable terms could have a material adverse effect on the Company's business,
financial condition and results of operations.

Page 21 of 26

---

We Depend on International Sales and Suppliers

Export sales have been a critical part of the Company's business. Sales to customers located outside the United States (including sales to the foreign operations
of customers with headquarters in the United States and foreign system manufacturers that sell to United States-based OEMs) accounted for 94% and 100% of the Company's net sales for the three months
ended July 31, 2002 and 2001, respectively. Export sales accounted for 89% and 98% of net sales in the six months ended July 31, 2002 and 2001, respectively. The Company expects that net
sales derived from international sales will continue to represent a significant portion of its total net sales. To date, the Company's international sales have been denominated in United States
dollars. Increases in the value of the U.S. dollar relative to the local currency of the Company's customers could make the Company's products relatively more expensive than competitors' products sold
in the customer's local currency.

International
manufacturers have produced, and are expected to continue to produce for the foreseeable future, all of the Company's wafers. In addition, many of the assembly and test
services used by the Company are procured from international sources. Under the Company's purchase orders with manufacturing suppliers, the wafers are priced in U.S. dollars.

International
sales and manufacturing operations are subject to a variety of risks, including fluctuations in currency exchange rates, tariffs, import restrictions and other trade
barriers, unexpected changes in regulatory requirements, longer accounts receivable payment cycles, potentially adverse tax consequences and export license requirements. In addition, the Company is
subject to the risks inherent in conducting business internationally including foreign government regulation, political and economic instability, and unexpected changes in diplomatic and trade
relationships. Moreover, the laws of certain foreign countries in which the Company's products may be developed, manufactured or sold, may not
protect the Company's intellectual property rights to the same extent as do the laws of the United States, thus increasing the possibility of piracy of the Company's products and intellectual
property. There can be no assurance that one or more of these risks will not have a material adverse effect on the Company's business, financial condition and results of operations.

We May Need Additional Capital

The Company requires substantial working capital to fund its business, particularly to finance inventories and accounts receivable and for capital expenditures.
The Company believes that its existing capital resources will be sufficient to meet the Company's capital requirements through the next 12 months, although the Company could be required, or
could elect, to seek to raise additional capital during such period. The Company's future capital requirements will depend on many factors, including the rate of net sales growth, timing and extent of
spending to support research and development programs in new and existing areas of technology, expansion of sales and marketing support activities, and timing and customer acceptance of new products.
The Company may raise additional equity or debt financing in the future. There can be no assurance that additional equity or debt financing, if required, will be available on acceptable terms or at
all.

We are Dependent on Qualified Personnel

The Company's future success depends in part on the continued service of its key engineering, sales, marketing, manufacturing, finance and executive personnel,
and its ability to identify, hire and retain additional personnel. There is intense competition for qualified personnel in the semiconductor industry, and there can be no assurance that the Company
will be able to continue to attract and retain qualified personnel necessary for the development of its business. The Company has experienced the loss of certain key personnel and also reduced
personnel in its restructuring. If the Company's headcount is not appropriate for its future direction and the Company fails to recruit key personnel

Page 22 of 26

---

critical to its future direction in a timely manner, it may have a material adverse effect on the Company's business, financial condition and results of operations.

Our Stock Price May Be Volatile

The market price of the Company's Common Stock, like that of other semiconductor companies, has been and is likely to continue to be, highly volatile. The market
has from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. The market price of the Company's Common Stock
could be subject to significant fluctuations in response to various factors, including quarter-to-quarter variations in the Company's anticipated or actual operating results,
announcements of new products, technological innovations or setbacks by the Company or its competitors, general conditions in the semiconductor
and PC industries, unanticipated shifts in the Handheld Systems market or industry standards, loss of key customers, changes in DRAM pricing, litigation commencement or developments, changes in or the
failure by the Company to meet estimates of the Company's performance by securities analysts, market conditions for high technology stocks in general, and other events or factors. In future quarters,
the Company's operating results may be below the expectations of public market analysts or investors. Since the Company's decline in revenues, gross margins and operating results, the market price of
the Common Stock has been and is expected to be for some time in the future, materially adversely affected.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

The Company's cash equivalents, short-term investments, and restricted cash are exposed to financial market risk due to fluctuations in interest
rates, which may affect our interest income. As of July 31, 2002, the Company's cash equivalents, short-term investments, and restricted cash earned interest at an average rate of
3.5%. Due to the short-term nature of the Company's investment portfolio, operating results or cash flows are vulnerable to sudden changes in market interest rates. Assuming a decline of
10% in the market interest rates at July 31, 2002, with consistent cash balances, interest income would be adversely affected by approximately $64,000 per quarter. The Company does not use its
investment portfolio for trading or other speculative purposes.

Foreign Currency Exchange Risk

Currently all of the Company's sales and the majority of its expenses are denominated in U.S. dollars. As a result, the Company has relatively little exposure to
foreign currency exchange rate risk. The Company does not currently enter into forward exchange contracts to hedge exposures denominated in foreign currencies or any other derivative financial
instruments for trading or speculative purposes. However, in the event exposure to foreign currency risk increases, the Company may choose to hedge those exposures.

Page 23 of 26

---



Part II.    Other Information

Item 1.Legal Proceedings

As
a general matter, the semiconductor industry is characterized by substantial litigation, regarding patent and other intellectual property rights. In December 1998, the Company
filed a lawsuit in the United States District Court for the District of Delaware against Trident Microsystems, Inc. The suit alleges that Trident's embedded DRAM graphics accelerators infringe
certain patents held by the Company. In January 1999, Trident filed a counter claim against the Company alleging an attempted monopolization in violation of antitrust laws, arising from
NeoMagic's filing of the patent infringement action against Trident. The Court ruled that there was no infringement by Trident. The Company filed an appeal in the United States Court of Appeals for
the Federal Circuit. On April 17, 2002, the United States Court of Appeals for the Federal Circuit affirmed the lower court's judgment of non-infringement on one patent and vacated
the courts judgment of non-infringement of another patent, thereby remanding it to the lower court for further proceedings. Management believes the Company has valid defenses against
Trident's claims. There can be no assurance as to the results of the patent infringement suit and the counter-suit for antitrust filed by Trident.

Item 2.Changes in Securities

None.

Item 3.Defaults Upon Senior Securities

None.

Item 4.Submission of Matters to a Vote of Security Holders

The
Annual Meeting of Stockholders was held on June 13, 2002. The matters voted upon at the meeting and results of the voting with respect to those matters were as follows:



Votes For

WithheldPrakash C. Agarwal

24,021,448

1,673,621Brian P. Dougherty

24,376,299

1,318,770James Lally

24,286,129

1,408,940Paul Richman

24,287,299

1,407,770Anil Gupta

24,284,199

1,410,870




Votes For

Against

Abstain24,985,391

617,285

92,393




Votes For

Against

Abstain20,725,948

4,893,445

75,676


Page 24 of 26

---



Votes For

Against

Abstain25,234,845

421,557

38,667


Item 5.Other Information

Not
applicable.

Item 6.Exhibits and Reports on Form 8-K



10.22

Full and Final Release from the Wafer Supply Agreement and the Product Sourcing Agreement99.1

Financial Statement Certification






Page 25 of 26

---



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

| |  | NEOMAGIC CORPORATION
(Registrant)                                                                      
| |  | -------------------------------------------------------------------------------------------------------
| |  | /s/STEPHEN T. LANZASTEPHEN T. LANZAChief Financial Officer
(Principal Financial and Accounting Officer)
| |  | September 11, 2002                                                                                     

Page 26 of 26

---

QuickLinks